Impact of Trump's Tariffs on Equity Markets

President Trump’s recent announcement of tariffs includes a 25% levy on imports from Canada and Mexico and a 10% increase on Chinese goods.

The date was initially postponed until March 1, but their implementation this week has sparked significant reactions across global markets. Equity markets have experienced heightened volatility, with major indices like the S&P 500 seeing 5%+ declines. Concerns about disrupted supply chains, increased costs for businesses, and potential inflationary pressures have contributed to this turbulence.

Additionally, retaliatory measures from Canada, Mexico, and China have further fueled fears of a prolonged trade war. While the long-term effects remain uncertain, it is clear that these tariffs are reshaping current investor sentiment and market dynamics.

Here are a few things to keep in mind over the course of the current news cycle.

U.S. trade is more important to Canada and Mexico’s economy than their trade is to ours.

The chart below shows that the majority of Canada and Mexico’s trade is done with the U.S., but only about 28% of trade in the U.S. is done with Canada and Mexico. China has more of an even playing field when it comes to trade; there, the bigger risk lies in sanctions and company/industry specific bans.

Source: U.S. Census Bureau, Statistics Canada, Bank of Mexico, OneDigital
As of 12/31/2024

We’ve seen this before.

If this is feeling a bit like Déjà vu, it’s because we saw this play out during the first Trump administration. Here’s a reminder of how that went:

The 2018-2019 tariff war also had a significant impact on markets. It led to higher volatility, as ups and downs were dictated by news flow on trade talks and the removal of tariffs/application of more tariffs. In general, there was a flight to perceived ‘safe haven’ assets globally.

• When talks broke down and/or additional tariffs were applied, U.S. stocks sold off. When talks resumed, U.S. stocks rose. Once the Phase I trade deal was announced in October 2019, U.S. stocks rose significantly. The S&P 500 fell 4.37% in 2018 but gained 31.35% in 2019.
• Chinese stocks also experienced volatility and sell-offs during the trade war but experienced a recovery as the tariff war subsided. For 2018, the S&P China A 100 Index fell 20.23%. But for 2019, it rose 40.77%.

In other words, tariffs caused short-term headwinds. Once markets grew accustomed to them and a resolution was reached in the form of the Phase I trade deal between the U.S. and China, volatility eased, and growth in financial markets reaccelerated.

While the long-term impact is unknown, we do expect short-term volatility to continue as long as uncertainty and policies are in flux. For our long-term investors, we don’t think any shifts in asset allocation are necessary and it may even make sense to rebalance back to strategic weights if volatility continues.

This material is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal. Past performance is not a guarantee of future results.

Investment advice offered through OneDigital Investment Advisors LLC.

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